International Franchising

• Author: Alison C. McElroy and Robert A. Lauer
• Pages: 473-555

473

CHAPTER 7

International Franchising

Alison C. McElroy and Robert A. Lauer

Contents

7-1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475

7-2. Initial Considerations for International Expansion . . . . . . . . . . . . . . . . . . 475

(a) Protection of Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475

(b) Internal Organizational Structuring and Personnel . . . . . . . . . . . . . . 475

(c) Supply Chain Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .476

(d) Potential Agreement Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477

(i) Direct Unit Franchises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477

(ii) Multiple Unit or Area Development Franchise . . . . . . . . . . . . . . 477

(iii) Master Franchise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478

(iv) Area Representative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479

(v) Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479

(e) Market Analysis Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479

(f) General International Business Considerations . . . . . . . . . . . . . . . . . . 480

(i) FCPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480

(ii) OFAC/Sanctions/Antiterrorism/SDN List . . . . . . . . . . . . . . . . . . 481

(iii) Export Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481

(iv) Antiboycott . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 482

(g) Role of Consultants and In-House, Outside, and Foreign Counsel . . 483

7-3. International Disclosure and Registration . . . . . . . . . . . . . . . . . . . . . . . . . 483

(a) International Disclosure Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 483

(b) International Disclosure Format and Substantive Requirements . . . . 484

(i) Mandatory Disclosure Formats . . . . . . . . . . . . . . . . . . . . . . . . . . . 485

(ii) Mandatory Local Language Requirements . . . . . . . . . . . . . . . . . .486

(iii) Mandatory Franchisor Director/Officer Certifications . . . . . . . . 486

(c) International Registrations and Filings . . . . . . . . . . . . . . . . . . . . . . . . 487

(i) Franchisor Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487

(ii) Offering Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487

(iii) Intellectual Property License Filings . . . . . . . . . . . . . . . . . . . . . . 488

(iv) Foreign Investment Filings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489

(d) International Sales Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490

(i) Earnings Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490

(ii) Operating Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491

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474 Franchise Law Compliance Manual

7-4. International Relationship Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492

(a) Existence and Scope of Franchise Relationship Laws and

Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492

(i) Restrictions on Termination, Transfer, and Renewal . . . . . . . . . 492

(ii) Mandatory Choice of Law and Forum . . . . . . . . . . . . . . . . . . . . . 494

(iii) Statutory Limitations on Contractual Terms and

Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494

(iv) Mandatory Franchisor Experience or Franchisee Safeguard

Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495

(v) Good Faith Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496

(b) Agency Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496

(i) Mandatory Filings and Coverage . . . . . . . . . . . . . . . . . . . . . . . . . 496

(ii) Avoiding Filings and Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . 497

(c) Government or Trade Association Policies . . . . . . . . . . . . . . . . . . . . . 497

7-5. Selected Continuing Legal and

Operational Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498

(a) Privacy and Data Protection Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . 498

(b) Tax and Currency Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499

(c) Language and Translation Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500

(d) Religious and Cultural Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .500

(e) Local Ownership and Real Estate Issues . . . . . . . . . . . . . . . . . . . . . . . 502

(f) Competition Law Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503

7-6. International Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504

(a) Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504

(b) Forum and Enforcement of Court Judgments . . . . . . . . . . . . . . . . . . . 505

(c) Arbitration and Enforcement of Awards . . . . . . . . . . . . . . . . . . . . . . . 505

(d) Enforcement Tools and Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . .505

(i) Letter of Credit and Bank Guaranties . . . . . . . . . . . . . . . . . . . . . . 506

(ii) Nonexclusivity or Territorial Alteration Rights . . . . . . . . . . . . . . 506

(iii) Auditing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .506

(iv) Workouts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506

7-7. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507

Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .507

Exhibit 7-1: Sample Project Plan for Evaluating and Launching an

International Franchising Effort . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 511

Exhibit 7-2: Sample International Franchise Agreement Provisions . . . . . . . . 519

Exhibit 7-3: Sample Development Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . 523

Checklist 7-1: Checklist of Terms for Master Franchise Agreement . . . . . . . . . 524

Exhibit 7-4: Resources for U.S. Companies Expanding Abroad (including

Key Government Websites) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .525

Exhibit 7-5: Sample International Franchise Application and Compliance

Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 526

Exhibit 7-6: Sample International Letter of Intent . . . . . . . . . . . . . . . . . . . . . . . 539

Checklist 7-2: Sample Closing and Organizational Checklists . . . . . . . . . . . . .550

Exhibit 7-7: Sample Irrevocable Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . 554

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Chapter 7 International Franchising 475

7-1. I ntroduct ion

U.S.-based franchise systems decide to expand internationally for a number of

reasons, ranging from a reasoned determination that the franchise system must

supplement U.S. growth to an ad hoc, opportunistic response to an unsolicited

inquiry from a potential franchisee with money. Whatever the reason for going

international, the decision to expand a U.S.-based franchise system internation-

ally should never be taken lightly or considered as franchising in a fifty-first state.

In most cases, a franchisor that does not understand and address the myriad busi-

ness, legal, and cultural issues involved with international franchising is doomed

to fail. This chapter outlines the key initial and continuing legal considerations

that a franchisor pursuing international expansion must address to protect the

franchise system and provide its international franchisees the best opportunity to

succeed.1

7-2. Initial Considerations for

International Expansion

(a) Protection of Intellectual Property

Trademarks, trade secrets, and other intellectual property are the cornerstones of

any franchise. A U.S. trademark registration does not automatically provide pro-

tection of the trademark in any other country. In addition, the rules governing

protection of confidential and trade secret information vary from country to coun-

try. Thus, a critical first step in international franchising is the evaluation and

protection of the franchise system’s intellectual property in foreign countries.

Specifically, before launching an international expansion effort, or granting a

franchise in a foreign country, one of the first steps a franchisor needs to take is

to apply for registration of its trademark. A franchisor should create a plan for its

international trademark portfolio that takes into account the franchisor’s budget,

expected timeline, and list of target countries. In setting timelines and target

countries, a franchisor should consider factors including (1) whether a country

has a first-to-file or first-to-use trademark system, (2) the use requirements and

time frames, and (3) whether a country has a history or reputation for trademark

piracy or squatters. The details of trademark registration and intellectual property

are described in more detail in chapter 1. In addition to registering the trademark

and logo in English language versions, a franchisor should consider registering

translations and transliterations of the trademarks and obtaining local domain

name registrations, especially in Asian and Middle Eastern markets.

(b) Internal Organizational Structuring and Personnel

In order to control and implement an international franchising program effec-

tively, a franchisor needs the internal organizational structure and personnel to

support international franchise development and continuing international

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